MKH Annual Report 2019

130 A N N U A L R E P O R T 2 0 1 9 3. SIGNIFICANT ACCOUNTING POLICIES (CONT’D) (u) Financial instruments (Cont’d) (ii) Financial liabilities and equity instruments Classification as debt or equity Financial liabilities and equity instruments issued by the Group and the Company are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group and the Company are recognised at the proceeds received, net of direct issue costs. Financial liabilities Payables are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost, using the effective interest rate method where the time value of money is significant. Interest bearing bank loans, overdrafts and issued debt are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in the statements of profit or loss. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Group and the Company derecognise financial liabilities when and only when, the Group’s and the Company’s obligations are discharged, cancelled or they expire. The differences between the carrying amount of the financial liability derecognised and the consideration paid is recognised in the statements of profit or loss. Prior to the adoption of MFRS 9, the accounting policies of the Group and the Company for financial instruments are as follows: Financial instruments (i) Initial recognition and measurement Financial instruments are recognised in the statements of financial position when and only when, the Group and the Company becomes a party to the contractual provisions of the financial instruments. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2019